It is tempting to berate the ECB for the slowness with which it seems to act. But yesterday's press conference, when Italian and French journalists asked questions, always in English, of an Italian ECB president, served as a reminder of just how far monetary policymaking in Europe has actually come.
However, it is a simple fact that as the ECB edges, one small step at a time, towards “unconventional monetary policy”, also known as quantitative easing (QE), it is doing so years after its UK and American counterparts got there. Indeed, the US central bank is now embarked on another slow journey, turning down the speed dial on the monetary printing presses.
The realpolitik of European monetary policy would never have allowed the ECB to act in the ways of the Bank of England or the Federal Reserve. We need to accept this and move on. Europe's monetary wars of the last quarter century and Germany's historically rooted fear of central banks that finance government spending combined to tie Mario Draghi's hands. It didn't help that his predecessor at the helm was pretty hapless.
So, all things considered, Draghi has achieved something remarkable: he has got the governing council of the ECB to start talking about QE and to agree to use it. They still try to talk in the conditional tense: we will do it if conditions warrant. They are falling over themselves to emphasise unanimity. Everyone, including the Germans, is on board. Having loaded the gun, all that remains is for Draghi to pull the trigger.
What is he waiting for? It’s not bank lending, credit creation, money supply, the economy, inflation or unemployment. All are signalling that while the recession might be over, things are still extremely fragile. As Draghi admitted, “[My] biggest fear is actually to some extent a reality and that is the protracted stagnation, longer than we have in our baseline scenario.”
We might be tempted to ask when does economic reality finally get into the ECB’s baseline scenario but that would be churlish. This is about getting the Germans on board, achieving necessary unanimity. It is all very well delivering an old-fashioned cut in interest rates without German consent. It is a completely different – political – ball game to begin QE without their nod of approval. It simply couldn’t happen.
Feel sorry
It is possible to feel sorry for the ECB president. He is at his most uncomfortable when he has to use tortured language. He has to square a lot of circles, persuade a lot of doubters. One journalist asked him about inflation expectations, something the ECB talks about incessantly, always with the same message: price expectations are stable and are consistent with the ECB's inflation target (less than, but close to, 2 per cent).
The ECB would be the first to admit that a fall in inflation expectations would be a very serious business, something it would have to act upon. When it was pointed out to him that several measures are in fact misbehaving, Draghi cheerfully agreed that some expectations are indeed dropping “just not the ones the ECB looks at”.
When quizzed about soggy bank lending, the ECB president tried to argue that it isn’t weak. He suggested that positive new lending is being offset by old loans being paid off. Most economists would call this deleveraging, something the Irish banks would, for example, be very familiar with. Draghi might as well argue that there is, in fact, lots of inflation, notwithstanding the actual data, because price rises of some goods and services are being offset by price falls in others.
Deleveraging is one of the key problems facing the Irish and European economies. And the interaction of debt repayment with inflation (or its absence) makes the current situation very dangerous. If Europe does slide into deflation we can look forward to potentially grave instability as the size of the debt problem then starts to grow again in real terms.
What would European QE look like? We know that the Germans don’t like printing money to buy government bonds. That just helps out the feckless periphery. Here the discussion gets technical. Draghi made it clear that he would like to buy “asset backed securities”, essentially packaged bank loans.
QE: coming soon? Watch the euro: if it slides against the dollar (as it should), the markets will be signalling a belief that Europe is finally getting with the programme.
